Fintechs: partnerships don’t mean you can be passive when it comes to compliance
Protecting the fintechs’ own well-being as well as that of their customers
Partnerships between established banks and fintechs (particularly fintech lenders) are on the rise. A recent PwC survey found that 82% of established financial services firms intend to increase their number of fintech partnerships over the next three to five years.
In theory, such collaboration has the makings of a “win-win” scenario. Established banks can get quick and easy access to new customer segments, particularly in the mobile realm. Meanwhile, fintechs can focus on their specialty – creating cutting-edge technology-enabled financial services that satisfy modern-day demands for speed and convenience.
As established banks increasingly “white-label” their services, fintechs may be falsely lulled into believing they do not need to dedicate significant effort to compliance. But in fact, fintechs need to be paying closer attention to compliance than ever before, for a number of reasons:
- The market for partnerships is getting more competitive
The fintech market has expanded dramatically over the past few years – according to CB Insights, the amount of VC money being poured into fintechs has more than doubled from 2017 to 2018. Today, there are more fintechs being started and many of them are hungry for established bank partners. As EY noted in its recent report, “competition is fierce because of the sheer numbers of firms and offerings”.
According to SuperMoney, in 2010, fintech lenders represented 3% of the personal loans sector, with banks, credit unions and traditional finance companies each holding approximately one-third of the market. The latest figures released by TransUnion show fintechs now owning 38% of the US personal loan market. This explosive growth has resulted in the original bank partners for fintechs (WebBank, CrossRiver and Bancorp, for example) becoming more selective.
While a fintech’s priorities often lean towards more customer convenience, banks are (comparatively) more focused on managing risk. These days, established banks are extra diligent about weighing a potential fintech partner’s regulatory and compliance risk downside against potential income to be gained. With such a plethora of partners to choose from, banks have the luxury of being more particular and are less willing to assume the risk or burden of fintechs that are considered less established and/or aren’t viewed as taking compliance seriously.
As the competitive landscape intensifies, fintechs that have a proper regulatory compliance program in place – including dedicated resources with deep BSA and consumer compliance experience – will have a clear advantage.
A comprehensive compliance program should include a focus on policy and procedures specific to the fintech, product development oversight, monitoring and testing, reporting process to the bank partner, corrective action processes, employee training, complaint management and more. Obviously the banking partner still needs to uphold rigorous oversight, but they’re able to do so in a more efficient and effective manner with a proper program in place at the fintech. Even the earliest stage fintech start-ups should institute an extensive approach to regulatory compliance, rather than waiting for an incident that may damage their reputation, “partnerability”, and the livelihoods of their customers.
- It’s a two-way street
Not only do established banks need to carefully consider fintechs, but fintechs need to do the same due diligence as they evaluate partner banks.
New frameworks offering better bank protections (such as partnerships structured to make the fintechs responsible for non-compliance, and enabling banks to terminate relationships without penalty in the case of legal violation) as well as new regulations (like the OCC’s announcement of a new Office of Innovation) will encourage greater bank/fintech collaboration. These new frameworks and regulations, along with the search for more customers, will encourage banks beyond the traditional core set of fintech banking partners to start experimenting in the partnership realm.
The potential downside is that some of these “fintech newcomer” partner banks do not have the adequate resources to provide comprehensive oversight of their fintech partners. These banks may not be properly suited to take on tens of thousands of new accounts or loan originations with their current personnel, organisation structure.
Making matters potentially worse, these bank partners come under extra scrutiny when partnering with fintechs, especially if the fintech offers products that are atypical in the consumer banking space or moves away from the bank’s traditional product suite. All of this means fintechs need to do their own due diligence when partnering with a bank. No fintech wants to take on unnecessary risk (reputational, operational, compliance) by partnering with an entity that is not appropriately equipped.
In summary, as fintechs evaluate potential partners, there’s a lot to think about – alignment across culture, value proposition, but perhaps most of all, regulatory compliance approaches. Fintechs must pay close attention, to both their own compliance programme, as well as the compliance management system of prospective business partners. Doing so will help these fintechs stand apart from the competition and recruit the best partners to bring their products and services to market, in a manner that protects the fintechs’ own well-being as well as that of their customers.
By Jonathan Consalvo,
chief compliance officer,
